Challenging the “trade off theories”?

The links between Financial and Social Performance

Empirical evidence from INCOFIN and CERISE

Cecile Lapenu and David Dewez CERISE and INCOFIN Social Performance Task Force Madrid, June the 2nd 2009

The Context

slide 3

Most of the microfinance literature indicates that there is a trade-off between financial and social performances. This would result in the believe that MFIs have to make a choice between social and financial objectives.

How real is that?

CERISE and INCOFIN have developed two social performance assessment methodologies: CERISE SPI and INCOFIN ECHOS ©

Both organization have their own dataset on Social Performance and were Interested in exploring the

links between Social and Financial Performance

Context

?

Part 1: Empirical evidences from INCOFIN

slide 5

INCOFIN Sample: 64 Social Performance With MFIs in 27 countries

slide 6

The Sample: SP FP Indicators

SOCIAL PERFORMANCE INDICATORS

FINANCIAL PERFORMANCE INDICATORS

5 social performance dimensions and 50 individual Indicators

1 compound indicator and 24 individual indicators

Source of Info: Due diligence (INCOFIN ECHOS ©) Dec 2008

Source of Info: Due diligence and audited reports - Dec 2008

Dimension 1: Mission and VisionDimension 2: Outreach & AccessDimension 3: Customer ServiceDimension 4: HRDimension 5: Environment and CSR

CRS Compound Index (7 dimensions, > 20 Financial indicators) ROA, ROEPARProductivityPortfolio YieldOER

IMPORTANCE ON DATA VALIDATION

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Social Performance by categories

69,7

75,5

71,1

66,0

67,0

68,0

69,0

70,0

71,0

72,0

73,0

74,0

75,0

76,0

NGO Bank Non Bank Financial Inst.

Social socore by Type

64,0

66,0

68,0

70,0

72,0

74,0

76,0

Small Medium Large

68,470,0

74,5

Social performance by size

Trade-off or not?

slide 9

INCOFIN Results when testing Correlation between SP and CRS

Positive correlation between SP and CRS

scores at 5% significance level

Part 2: Empirical evidences from CERISE

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CERISE Sample: Social Performanceof 126 MFIs from 39 countries

MFI governance type

NBFI= 15

Bank=4

Credit Union =

29

NGO= 68

MFI region

Asia=11

ECA=3

LAC=84

Afica=21MENA=7

1927

61

86

1813

4941

36

Large Medium Small Mature Young New Rural Mixed Urban

Size Age Type

slide 12

The Sample: SP FP Indicators

SOCIAL PERFORMANCE INDICATORS FINANCIAL PERFORMANCE

INDICATORS

4 social performance dimensions, 12 criteria, 60 indicators

Classical financial ratios

Source: SPI audits (2006-2009), verified by peers, networks, support organization, investors

Source of Info: Mix market

1. Targeting1.1 geographic1.2 individual1.3 pro-poormethodology

3. Capacity building3.1 transparency-trust3.2 participation3.3 empowerment

ROA, ROEPAR 30Borrowers/staffOperative expense ratioOperational self sufficiency

2. Products & services 2.1 diversification 2.2 quality 2.3 innovation &. non fin.

4. Social responsibility 4.1 towards employees 4.2 towards customers 4.3 towards community

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Social score by peer groupexample: by type of MFIs

0%

20%

40%

60%

80%

100%1. Targeting poor excluded

2. Products& services

3. Capacity reinforcement

4. Social responsibility

Bank (N=4)

Credit Union(N=29)NBFI (N=15)

NGO (N=68)

3. Benefits to clients / social capital

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Poverty targeting can be costly but other SP dimensions have positive effects on FP

Pearson correlation test

Borrowers/ staff PAR 30

Op. exp ratio OSS ROA

# active borrowers

1. Targeting ++ ns - ns ns ns 1.1 geographic ++ ns ns ns ns ns 1.2 individual ns ns - - ns ns ns 1.3 pro-poor methodology + ns ns ns ns ns 2. Products & services ns ns + ns ns ns 2.1 diversification - ns ++ ns ns ns 2.2 quality ns ns ns ns ns ++ 2.3 innovation &. non fin. ns ns ns ns ns ns 3. Benefits for clients + ns + ns ns ns 3.1 transparency-trust ns ns + - - ns 3.2 participation ns ns ns - ns ns 3.3 empowerment ns ns ns ns ns ns 4. Social responsibility ns ++ ns ns ns ++ 4.1 towards employees ns + ns ns ns + 4.2 towards customers ns ns ns ns ns + 4.3 towards community ns + ns ns ns ++ Total social ++ ns ns ns ns ++ Significant convergence ++ / - - Correlation is significant at the level 0.01 (2-tailed) Significant divergence + / - Correlation is significant at the level 0.05 (2-tailed)

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Conclusions on SPI database

It remains costly to do individual targeting, but adapted methodologies (participation, geog. outreach, specific products) help combining both objectives

High social responsibility is associated with better repayment

It is easier for larger MFIs to be have good SP (services, SR) but not for the largest one (last hypothesis still to be tested)

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INCOFIN found no correlation between SP and individual financial Performance Indicators but significant correlation with compound financial index.

CERISE confirms hypothesis and results from 2008 with more detailed analysis by criteria.

There is definitely NOT a trade-off between SP and FP

Next steps: Continue analysis, publish results ; deepen stat. models; Explain the direction of causality

General Conclusions